Lending money to elderly parent as bridging loan - tax issues?

murphy_le_chat

Our 88-year old Mum is 'down-sizing': she's put in an offer on a retirement apartment which she really likes. Her detached house is up for sale; she's had quite a lot of interest, and 2 offers, but both have fallen through because of chains- it's dragging on more than she'd like.
My 2 brothers and I have offered to cash-in some of our Cash ISAs to use as a loan to our Mother, so she can go ahead and buy the flat. We're confident that she'll find a buyer within a few months. Will we, or she, be liable for tax on the amounts we pay to her, and she pays back to us? We'd obviously loose the ability to put it all back into an ISA in one year. She's offered to pay an equivalent amount of interest to cover our loss. The flat is about £100k so we will lend her 2 x £50k or 3 x £33k approximately.

Bluebirdman_of_Alcathays

You will have to pay tax on the interest payments if it exceeds £1000 (BR payer) or £500 (HR payer) - it would be far simpler if it were simply a gift that she returns.

eddddy

Bluebirdman_of_Alcathays wrote: »

- it would be far simpler if it were simply a gift that she returns.

Except that, if the elderly parent dies before 'gifting' the money back, it becomes part of her estate - and, depending on the parent's will, the money may not go back to the OP.

Even worse if the parent's estate is worth more than £325k and the parent doesn't survive for 7 years, the 'gift' back would be taxed at 40% IHT.

So the better approach might be to make it a loan - with documented evidence.


As for the interest - you can either treat that as income, and pay income tax... or treat it as a gift, and you might have to pay IHT.

eddddy

... and don't forget to budget for the extra 3% stamp duty for second properties, if the retirement property costs over £40k.

It can be reclaimed once the house is sold.

Bluebirdman_of_Alcathays

eddddy wrote: »

Except that, if the elderly parent dies before 'gifting' the money back, it becomes part of her estate - and, depending on the parent's will, the money may not go back to the OP.

Even worse if the parent's estate is worth more than £325k and the parent doesn't survive for 7 years, the 'gift' back would be taxed at 40% IHT.

So the better approach might be to make it a loan - with documented evidence.


As for the interest - you can either treat that as income, and pay income tax... or treat it as a gift, and you might have to pay IHT.

I did consider IHT - but thought that the linked transactions would complete (and hence the loan repayment) before the parent's death - dying people don't in my experience buy property. But then I suppose I mustn't assume.


Can you make an election on the interest income? It's been many years since I've come across something like this. If it is a market rate of interest that is related to the loan (as this is), then I thought by definition it is interest income and must be declared as such. I'm not at work so don't have the resources to check and can't find anything on HMRC website to corroborate, so unsure.

teddysmum

Could you not give an interest free documented loan and then have a cash gift from your mum ?

eddddy

teddysmum wrote: »

Could you not give an interest free documented loan and then have a cash gift from your mum ?

Yes. But the issue is: if mum dies within 7 years the OP might have to pay IHT at 40% on the gift. (Depending on annual exemptions, value of the eventual estate etc.)

Although, if it is literally cash drawn out of the bank by mum and handed over to the OP with no documentation...

murphy_le_chat

Thanks for all the replies...

teddysmum wrote: »

Could you not give an interest free documented loan and then have a cash gift from your mum ?

I assume you mean 'the interest as a cash gift'...?

If, for example, she needs the loan for say, 3 months, the amount of interest we'd each lose would only be about £200 at current cash ISA rates. She doesn't want us to be out-of-pocket.

Is there anywhere I can find a simple 'pro-forma' loan document?

booksurr

murphy_le_chat wrote: »

Thanks for all the replies...

I assume you mean 'the interest as a cash gift'...?

If, for example, she needs the loan for say, 3 months, the amount of interest we'd each lose would only be about £200 at current cash ISA rates. She doesn't want us to be out-of-pocket.

Is there anywhere I can find a simple 'pro-forma' loan document?

if she gives you £200 it is unquestionably interest not a gift and so you should be taxed on it as your income since it is outside of a tax free ISA

clearly your choice therefore is do you risk being caught or do you play by the rules? Your decision!

as for a pro forma...

Dear Mum
I am loaning you £xx,000 towards your purchase of a new property. This money is to be repaid within x days / months of the date when the sale of your current property completes and you receive the money from that sale.

You agree to pay me £x extra on top of the amount loaned. This is equivalent to an annual interest rate of x% on the loan .

Enjoy your new home.
Love Son

AnotherJoe

Bluebirdman_of_Alcathays wrote: »

I did consider IHT - but thought that the linked transactions would complete (and hence the loan repayment) before the parent's death - dying people don't in my experience buy property.

Of course they do, unless you believe that starting the process of purchasing a property makes you immortal

Document the loans. I'd make them interest free as well just to avoid the faff of filling in forms. You'll get it all back at some point anyway I presume..

agrinnall

booksurr wrote: »

if she gives you £200 it is unquestionably interest not a gift and so you should be taxed on it as your income since it is outside of a tax free ISA

Bit of a sweeping statement, surely that depends on the OP's personal tax situation and level of interest earned outside of tax free wrappers. There's a good chance that the £200 won't be taxable at all.